Glass half full for SEB’s global head of investment strategy

Prices for bonds and equities may be excessively depressed given the fundamental outlook for the global economy says SEB’s global head of investment strategy Hans Peterson.

In the Swedish bank’s latest quarterly Investment Outlook report, Peterson’s team of analysts conclude that while the economic cycle has moved into its next phase of moderated growth, there has been a touch too much emphasis on downside risks.

Policymakers on both sides of the Atlantic may be steering a narrow path but concerns about issues such as the ending of QE2 should be put in context of fundamentals, Peterson says.

If policymakers in the West deal prudently with the debt and emerging markets deal with the issue of inflation then the global economy could be in for a few good years with “potential for a long upturn in the cycle.”

“There are always risks, but these are priced into equity and bond markets,” Peterson says.

The challenge is that the world has not come out of a recession in quite the same way in the past, and there are questions over just at what point in the cycle the global economy finds iteslf. At this point in a “normal” recovery, Peterson says he would expect equity and bond prices to be anywhere up to 30% higher than they currently are.

SEB is predicting global GDP growth of about 4% for the next couple of years, he adds.

Peterson is optimistic on specific issues. On QE2 he says that the Federal Reserve understands factors such as the way the additional money already pumped into the system may still be stuck with the banks and has not yet fully flowed through to the broader US economy. The Fed will not end QE2 with the deliberate intention of causing another recession he notes.

On fiscal issues, he believes that, for example, US legislators will find a way to agree a way forward, notwithstanding that there is a US presidential election year upcoming.

The Investment Outlook goes in-depth on three themes: risks, the need to adjust portfolios to account for the economic cycle, and new factors determining the best investments to make in stock markets.

The risks, as noted, include issues such as government debt and emerging market inflation. Portfolio adjustment is pointing to the need for investors to gain greater exposure to non-cyclical stocks. And factors such as China’s continued growth and the weak dollar point to greater exposure to Chinese and US stocks.

Commodities as an asset class is given short thrift. SEB believes that commodities prices have “hit a wall” and that the recent collapse in the silver rally could be followed by a similar collapse in gold. Recent weather patterns also point to lower prices of soft commodities, the report adds.